ISAS were a great idea in 1999, but in 2019 they need a pep-up
It is not quite up there with the first moon landing, the start of the Second World War, or even the birth of Napoleon Bonaparte, all of which are marking 50th, 80th, and 250th anniversaries respectively in 2019. But today – Saturday April 6 – marks the 20th anniversary of the launch of the Individual Savings Account, through which many millions of us have funnelled our savings into the stock market.
In the two decades since then, the ISA has been a success – but in truth only a modest one. And yet the idea of the ISA, and the plans that preceded it, was to create a high-saving, equityowning culture in which people took control over their own lives and had a stake in a free market enterprise culture. On that measure, it hasn’t really worked. It was a great objective, but as it goes into its third decade it needs to be turbocharged. How? By giving tax relief as well as tax breaks, by exempting it from inheritance tax and by extending it to new forms of finance such as crowdfunding. Any of those reforms, and preferably all three, might enable it to finally fulfil its promise.
The ISA was launched on April 6 1999, way back in the days when Gordon Brown was still a relatively fresh-faced young chancellor promising to bring an end to “Tory boom and bust”.
It replaced the Personal Equity Plan, which had been launched by Nigel Lawson in the heyday of Thatcherism, and streamlined its rules.
For Lawson, the aim had been a simple and straightforward one. People should save more, taking more control of their own lives; and be encouraged to own shares, which would give them a direct stake in a capitalist system. It was part of a project of creating a wealthy, pro-business, property-owning democracy.
Taking the two together, the Government has been giving tax breaks on share ownership and saving for a third of a century. Has it worked? Not really.
You only have to take a stroll through any shopping mall on a Saturday afternoon to be reminded that the British remain as stubbornly
reluctant to save as they have always been. The savings ratio has almost halved as a percentage of GDP over the last two decades as we carry on cheerfully hammering our credit cards. And the rate of individual share ownership hit an all-time low of 10.6pc in 2012, fifteen years after the ISA was launched, and has edged up only marginally since then to slightly over 12pc. Maybe both figures would be even worse if the ISA had never been launched, but it is hard to see either figure as a great triumph.
True, there are around 11m accounts opened every tax year, so people are still funnelling money into the scheme, and more than £600bn are held in assets through ISAS, according to HMRC statistics. And yet, at best, the ISA has mopped up existing savings into a convenient wrapper.
Despite that, the idea was a fantastic one. A genuine boost to both saving and share ownership would be great for the economy.
How could we make that happen? Here are three good places to start.
First, how about making contributions tax deductible, in the same way that contributions into your pension scheme are, and as similar equity-based savings schemes are in other countries? Sure, that would be expensive, but it could be limited to, say, £5,000 per year initially, so that it was only of real benefit to people on average to slightly-above-average earnings. That would immediately boost the amount of money in every account as well as providing a genuine incentive to save more.
Next, how about extending the tax breaks? At the moment, an ISA protects your savings from income tax and capital gains taxes. But these are meant to be long-term savings. You can pass on your ISA to your spouse or civil partner free of inheritance tax, but why not make them exempt from inheritance tax as well? That way, families could build up substantial equity portfolios over several generations, and pass them on to their children. Equities really come into their own when they are held for a long, long time. As we know from the housing market, building wealth that can be held within the family is an incredibly powerful incentive – and if people could do that in equities as well as property it would be far better for the economy.
Finally, open up the pool of investments. The innovative finance ISA was a decent enough idea, opening up the scheme to the new breed of peer-to-peer lenders, which pay far higher interest rates.
But the real excitement now is in the new crowdfunding equity schemes that are funnelling money into tiny start-up companies through unlisted equities.
If investors could hold those shares through their ISAS as well, it would put rocket-fuel into that market – and the capital gains on those businesses, at least when they survive and flourish, will be genuinely spectacular. The more money that goes into start-up business, the healthier the economy will be.
Of course, any of those changes would cost the Treasury some money – and that is never popular. But the public finances are in perfectly respectable shape, and none of those reforms would be especially expensive in the first few years.
The original idea of PEPS and then ISAS was to create a culture of saving and self-reliance. And it was to encourage people to have a direct stake in companies so that they had a stake in the system. In truth, we need that even more in 2019 than we did in either 1986 when the PEP was launched, or in 1999 when the ISA took its place – which is why it needs to be made a lot more attractive if it is to live up to the admirable ideals behind its launch.
‘If investors could hold those shares through ISAS as well, it would put rocket-fuel into the crowdfunding market’